Capital Management Group
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Glossary of Terms

Accounts Payable (A/P) Expenses incurred and purchases made, but not paid for.
Accounts Receivable (A/R) Sales made but not collected.
Accounts Receivable Financing Short-term financing obtained by pledging receivables to the lender (as collateral for a loan). This enables a business owner to draw against an established line of credit, dictated by a formula (a percentage of accounts receivable).
Adequate Notice The length of time required to notify your lender of business action such as cancellation of a lease or prepayment of a loan. Adequate notice is predetermined in writing.
Advance Money withdrawn from a pre-approved line of credit.
Aging of Accounts Receivable Accounting record of customer's receivables showing how long receivables have remained unpaid beyond regular terms of sale. Used as basis for advancing credit.
Amortization Schedule A chart or table that breaks a monthly loan payment into two categories; principal and interest. It also reports the balance due.
Annual Percentage Rate The cost of credit as a yearly rate.
Articles of Incorporation Legal document filed by a prospective corporation’s owners in a designated state that explains the purpose of the corporation, its directors, and the distributed shares of stock. When approved by the state, the corporation then becomes a legal entity.
Assets What the company owns. Current assets can be converted into cash in one year. Non-Current Assets take one year or more to turn into cash.
Asset-based Lending Financing secured by pledging assets (inventory, receivables, or collateral other than real estate).
Available Credit The unused portion of a line of credit.
Breakeven Point When a company has neither a profit nor a loss. It’s considered to be at the breakeven point. One dollar more and the company have a profit; one dollar less and the company show a loss.
Bridge Loan Loan that provides liquidity until defined event occurs that will generate cash, such as sale of noncurrent assets, replacement financing, or equity infusion.
Business Credit Loans made to businesses in the form of a term loan or a line of credit.
Business Plan An overview put together by new companies and existing companies that are trying to obtain a loan. It includes all aspects of a business and financial statements.
Bylaws A set of rules or regulations adopted to control internal affairs of organization.
Call If the loan covenants (rules) are broken or if the maturity is reached, “calling” a loan means it must be paid in full.
Cap A cap limits a loan’s interest rate from rising beyond a certain rate. A10% loan with a 2% cap will only rise to 12%.
Capacity Borrower’s ability to repay a debt.
Capital or Net Worth Assets less liabilities. The amount of money invested in the business plus the retained earnings. A business can have a negative balance.
Cash Basis A type of accounting system that recognizes cash when it is received and expenses when they are paid. See page 21.
Cash Collateral Bank deposits and similar assets that can be converted to cash quickly.
Cash Flow Money available from a business’ operations to satisfy cash needs. The primary source for monthly payments on a loan.
Collateral Assets pledged to support a loan. The money received from liquidating the assets is the secondary source of a loan repayment.
Collateral Value Value of pledged asset(s) as determined by an appraisal or other methods of valuation. Lenders often discount collateral by a certain percentage. 29
Commercial Debt Loan or obligation incurred for business purposes.
Commercial Mortgage A loan for a business’ real estate. Rates and terms are negotiated and the finance charge is usually related to the prime rate.
Commitment When a lender agrees to lend a specific amount, with rates, terms, conditions and covenants... in writing.
Commitment Letter Form letter from lender stating willingness to advance funds
Cosigner A person who signs and guarantees a loan for someone else.
Contingent Liabilities Money you agreed to repay by signing notes, or by being a co-maker or guarantor of loans. Lenders want to know how much money you are liable for if the loan results in legal actions or contested taxes.
Cost of Goods Sold Cost to make a product, including materials, labor, and related overhead.
Covenant Loan agreement rules for the borrower as dictated by the lender.
Credit Lender’s agreement to provide funds or apply money to an account owned by the customer.
Credit Line Certain amount of money available to a borrower for a predetermined period of time.
Credit Rating An individual’s worthiness for credit as determined by a credit reporting agency. In addition to the information these agencies provide, lenders use tax returns and other financial statements to determine your credit worthiness.
Credit Scoring A predetermined process of scoring which is used to approve or reject loan applications.
Current Assets Assets that can be converted into cash in one year. Non-Current Assets take one year or more.
Current Liabilities Liabilities due within one year.
Debt Ratio Measure of firm's leverage position derived by dividing total debts to equity.
Depreciation Except for land, assets wear out. The value goes down and can be deducted from your business as an expense. Present values of assets are shown as original cost less depreciation. Market value, or the price you could sell it for, could differ from this figure.
Draw Down Activating a line of credit. For example, when you “draw down” a line of credit, you activate it.
Due Diligence 1. Responsibility of bank directors and officers to act in prudent manner in evaluating credit applications; in essence, using same degree of care that ordinary person would use in making same analysis.
2. Review that is made of loan by acquiring bank.
Equity Difference between the total assets of a business and the total liabilities.
Factor Lender that purchases borrower's accounts receivable and may extend funds to borrower prior to collection of receivables.
Factoring Short-term financing from the sale of accounts receivable to a third party.
Financial Analysis Evaluation customer's financial situation to determine whether customer has ability to meet his or her obligations as they become due. Factors such as general conditions of customer's industry, organizational structure, available collateral or guarantees, and financial performance are considered.
Fixed Assets Assets like furniture, fixtures, equipment, machinery, and real estate.
Generally Accepted Accounting Principles (GAAP) Conventions, rules, and procedures that define accepted accounting practices, including broad guidelines as well as detailed procedures. Financial Accounting Standards Board, independent self-regulatory organization, is responsible for promulgating these principles.
General Partner When a business is a partnership, every owner who holds a share (a percentage) of the company shares in the profits and losses. General partners are responsible for total liabilities.
Gross Profit Gross sales less cost of goods sold. This is your mark-up. Also called gross margin.
Gross Sales Revenue or income from sales before returns and allowances.
Guaranty (or Guarantee) Agreement by a third party to pay debt if the borrower does not.
Guarantor A guarantor has the same responsibilities as a co-signer. If the loan goes into default and is not paid by the signer(s) of the loan, the guarantor is responsible.
Guaranty A separate agreement by which party (or parties) other than borrower assumes responsibility for payment of obligation if principal debtor defaults or is subsequently unable to perform under terms of obligation.
Goodwill The difference between the value of the hard assets and the business’ selling price. Also called “blue sky.”
Hypothecate To pledge or assign property owned by one entity as security or collateral for loan to second entity.
Income Statement Financial statement showing a business’ profit and loss over a period of time (usually a month or a year).
Interest Money paid (cost of credit) for the use of money.
Interest rate Money paid (cost of credit) for the use of money. Interest rate The interest expressed as a percentage rate.
Inventory Assets held for eventual resale. May be in the form of raw materials, work in progress, or finished goods.
Lease Contract giving a business owner the right to use an asset for a specified period of time. The asset owner is called the lesser and the owner using the property is called the lessee. Can be used for a building, equipment or machinery.
Leasehold Improvements Improving your leased business location, at your own expense.
Lender One who extends funds to another with expectation of repayment (with interest)...
Letter of Credit (L/C) Payments to a third party by the lender, on the owner’s behalf.
Lien A claim against a business’ assets to secure payment of a debt.
Limited Partnership Partner that invests in a business and receives a share of the profits (or losses). A partner’s liability is limited by the amount of his or her investment. A limited partner does not have any management authority in the operation of the business; the role is purely that of an investor.
Liabilities How much the company owes. Current liabilities are those due within one year. Long-term liabilities are due after one year.
Liquid Asset Asset that can be turned into cash quickly
Liquidity A company’s ability to pay its expenses. The ability to turn an asset into cash (such as selling a piece of machinery).
Loan Agreement The document or contract of the parties that reflects the commitment.
Loan Committee Team that evaluates approves or denies loan applications. Whether a loan officer or a loan committee decides on a loan request may vary by type of loan and lender.
Loan Package Documentation Documents for the commercial loan contract including financial statements, a business plan, and a credit report. It includes legal documents that show the debt, notes, mortgages/leases, and loan agreements.
Loan Grading System of classification that evaluates risk by assigning a number according to risk. Loan grading is used by lenders, and helps lenders to evaluate loan applications and manage loans.
Long-Term Liabilities Expenses, loans, and payables due after one year
Marketing Activities used to sell a product or service to the purchaser.
Market Value The price an asset, product or service will bring in a current, competitive market.
Merchant Agreement Written agreement between a credit card processing bank and merchants (who allow clients to use credit cards). The bank turns the credit card sales into deposits for the merchant and charges a processing fee.
Net Profit Money left after all expenses have been paid. Used to pay loans and to grow the company.
Net Sales Revenue or income from sales after returns and allowances are deducted.
Net Worth Assets less liabilities.
Non-Current Assets Assets that take one year or more to turn into cash.
Notary Public Person authorized by the state to administer oaths and witness documents. A notary’s seal and signature authenticates a document.
Outstanding Checks Checks that have been sent for payment but are still in the process of being collected by the bank.
Overdraft When the amount of a check exceeds the available balance. Overdraft protection allows business owners to write checks for more than the account balance without the checks being returned. This service must be approved by the bank.
Owners’ Investment The money owners have invested in a business.
Prime Rate The rate of interest per annum announced by the lender from time to time. Most business owners are charged the printed rate plus a percentage (if the prime rate is 6%, the borrower is charged “prime + 2” or 8%).
Pro Forma Forecasting future income, expenses, or cash flow with projections.
Retained Earnings Net profits accumulated through the company’s life and reported in the net worth or equity section of the balance sheet. Note: Can be negative if losses occur.
Rate of interest Fixed: Interest rate remains the same for the length of the loan. Variable: Interest rate depends upon an index and increases or decreases (for example, the prime rate or the Treasury Bill index).
Ratios Ratios are your business’ “scores” that come from your Income Statement and Balance Sheet, not the Cash Flow Statement.
Refinancing Replacing existing loans with new loans that have different terms. Often called “refi.”
Rescheduling Extending the length of time required to pay the loan which adjusts the monthly payment.
Release Releasing collateral when a loan has been paid off or substituted by other collateral.
Revolving Credit Commitment under which funds can be borrowed, repaid, and re-borrowed during life of credit. Such credits have stated maturity date at which time borrower may have option of converting outstanding balance into term loan.
Secured Loan Loan secured by collateral (which will be liquidated if the borrower defaults on the loan).
Tangible Asset Real property such as buildings and machinery. Trademarks, goodwill, or accounts receivable are not considered tangible assets.
Term A loan’s maturity, stated in months or years.
Term Loan Loan, given in one lump sum, is provided at the closing. Repayment is monthly.
Trend Analysis A process by which lenders examine business statements and financial ratios to determine if the financial strength is improving or weakening.
Uniform Commercial Code (UCC) Comprehensive set of statutes created to provide uniformity in business laws in all states, as approved by National Conference of Commissioners on Uniform State Laws. Statutes can vary from state to state.
Working Capital Difference between current assets and current liabilities. An indication of liquidity and the ability to meet current obligations.